Transcript Abenomics”: Can Japan’s “Honest Abe” Emancipate Japan from the

“ABE-nomics”
Can Japan’s “Honest ABE”
Emancipate Japan from the
15-year Shackles of Deflation
(& win his 3rd “Oscar”)?
18 April 2013
Yosuke KAWAKAMI
Minister for Financial Affairs, Embassy of Japan
*Views expressed are personal & solely of the speaker
1
Prologue: Japan’s “4-D Syndrome” in Lost Decade
Fig. １ Vicious “4（5）-D”circle (or equilibrium)
（∫Deficits ＝）Debt
Demographics
Psychological
Depression?
 Even while mired in deflation,
economy has grown in
real terms
 But most citizens feel less rich
(unless travelling abroad to
reap gains from \ appreciation)
Deflation
 Japan & its electronics industry
threatened by
China & Korean competition2
1. “ABE-nomics”: introduction
(Nov. 2012: Honest ABE’s “Gettysburg” Moment)
 Emancipate Japan from deflation
“3 Arrows” (cf. Mouri family precept)
Bold Monetary Policy: “(Othello-game) Regime change”
Flexible Fiscal Policy: Stimulus & Consolidation
Growth Strategy: Innovation & Structural Reform
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2. Market Reaction: so far, so good
Currency: weakened 20% (1$=¥80 → ¥98)
Equities: up more than 40% (Nikkei 225: 9000 → 13,200)
Interest rates: even lower (10-year JGB yield ≈ 0.6%)
N.B. No explicit depreciation target (let alone devaluation)
Overdue correction of overvalued Yen (←safe haven demand)
induced by recent changes in market fundamentals
US recovery
Improved outlook for euro’s survival
First Japanese trade deficit in 32 years (2011 & 12)
(will return to “int’l spillovers”→ p.10)
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
3. Arrow #1:
Audacious Monetary Policy
2% inflation target: Joint Gov’t & BoJ Declaration (Jan. 2013)
 “Utilize all possible measures”: New Governor Kuroda (March 2013)
 “Quantitative & Qualitative Easing (Q²E) ” (April 3-4 BoJ MPM)
“2x4” : Double monetary base (MB) to \270 trln & double JGB duration
→ achieve 2% inflation in about 2 years
“New dimension” in monetary easing
Adoption of MB control ; increase MB by \60-70 trln per annum
Increase JGB holdings by \50 trln per annum, including longer JGBs (up to 40 years)
→ for MP purposes (not monetization); temporary suspension of “banknote ceiling”
Increase purchases of ETFs & J-REITS
Forward guidance: continue Q²E as long as necessary to achieve & maintain target
5
(will return to MP → Epilogue)
4. Arrow #2:
Flexible Fiscal Policy
(1) Short-term Stimulus
“Emergency Economic Measures” (January 2013)
 ¥10 trln fiscal stimulus: 2% of GDP
←”15-month budget” (2012 Supplementary & 2013 Budget)
Accelerate Tohoku reconstruction
Reinforce infrastructure
Invest in innovation
renewable energy & conservation technologies
→ ¥20 trln economic effect & 600,000 employment
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4. Arrow #2:
Flexible Fiscal Policy
(2) Medium-term Consolidation
Raise Consumption Tax to 8% (2014) & 10% (2015)
Commitment to:
 Halve primary deficit by 2015
 Achieve primary balance (PB) by 2020
(PB = fiscal balance, net of JGB issuance/repayments)
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5. Arrow #3:
Effective Growth Strategy
Innovation
 Biotech: iPS cells & regenerative medicine
 Robotics & Nanotech
 Green technology
 Next-generation infrastructure
 Deep sea exploration & mining
Supply-side: deregulation & structural reform
 Labour market & nursery services
 Agriculture reform
“Green” industry: renewable & energy conservation
“Silver” industry: health & medicine, tourism
Free trade negotiations
 Trans-Pacific Partnership
 EU-Japan Economic Partnership Agreement
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6. “ABE-nomics”: Return & Risks
Monetary & fiscal stimuli: “Potent (toxic?) medicine” to

Kick-start economy, cure depression & avoid “deflationary spiral”
cf. “escape velocity” (incoming BoE Governor Carney)
→
Virtuous circle of stable & sustainable growth led by private C&I
Real Growth
Nominal Growth
CPI
CY 2012
2.0%
1.1%
-0.1%
FY 2013 (projected)
2.5%
2.7%
0.5%
Risks? : Yes, “Narrow Path” (or “Economic Tightrope”)
 (hyper-) Inflation w/o growth
 Loss of fiscal confidence
cf. some firms already responding w/ wage hikes
← corporate retained earnings
← virtual “work-sharing” in past
→ low unemployment (around 4%), but wages depressed
9
Int’l spillovers?=Maybe; “Currency war”=No
1) G7 Statement (12 February 2013)
"We, the G7 Ministers and Governors, reaffirm our
longstanding commitment to market determined
exchange rates and to consult closely in regard to
actions in foreign exchange markets.
We reaffirm that our fiscal and monetary policies
have been and will remain oriented towards meeting
our respective domestic objectives using domestic
instruments, and that we will not target exchange
rates. …"
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2) G20 Communique (16 February 2013)
2. Thanks to the important policy actions in Europe, the US,
Japan, and the resilience of the Chinese economy, tail risks
to the global economy have receded and financial market
conditions have improved.
3. …Monetary policy should be directed toward domestic
price stability and continuing to support economic recovery
according to the respective mandates. We commit to
monitor and minimize the negative spillovers on other
countries of policies implemented for domestic purposes.
5. …We will refrain from competitive devaluation. We will
not target our exchange rates for competitive purposes, will
resist all forms of protectionism and keep our markets open.
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Epilogue: Implications for other advanced economies &
New dimensions/horizons in monetary policy?
1) “Japanisation” for most advanced economies?
prolonged slump due to deleveraging following a severe financial crisis
2) Monetary policy “Civil War”?
--- “Orthodox” vs. “Reflationists”
Conventional (orthodox)
(Zero-bound)
Non-conventional (heterodox): “pushing on a string”?
ZIRP, QE, “Time-horizon effect” (forward guidance)
(pioneered by BoJ)
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3) Rethink fiscal-monetary “space” in a
deflationary/deleveraging “universe”?
Fig. 2: “The Global Macro Chessboard” (McCulley&Pozsar; 2013)
Inflation Risks Dominate
Crowding Out Risks
Deflation Risks Dominate
No Crowding Out Risks
Private Sector
“M M”
Leveraging
Deficits
1
2
3
4
Deleveraging
Surpluses
5
QE2
8
9
10
Helic.
Money
Economics:
“dismal science” or “art”?
BoJ→
11
12
QE3
↓
“B B”
McCulley&Pozsar (GIC2013)
Lord Turner (FSA/Cass2013)
6
QE1
7
SNB→
“non-Euclidean/Einsteinian”
”sur-realism” dimension
BoE→
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Austerity
Surpluses
Fiscal Policy
Stimulus
Deficits
y
Sargent
Wallace
14
SMP
15
LTRO
16
17
18
OMT→
Unconv. Radical Nuclear
QE
“Z B”
Monetary Independence
FMC
~
Conventional
Rates
Fiscal-Monetary
(+Financial) Cooperation
⇔
x
“alchemic/Faustian”
“Race to the Bottom”
(End) 13